It’s been almost two years since the Supreme Court cleared the way for state legalization of sports betting, and in that time, 13 states have done so fully, with six more to follow suit, with the appropriate legislation already approved. By the summer, that number will likely swell to include more than half of U.S. states. But are customers getting a properly competitive market place?
I question whether things have been set up in a way that allows a newly regulated industry to thrive. This is because sports-betting licenses are essentially automatically granted to in-state gambling outlets such as casinos or horse racing tracks, rather than it being an open market for any new provider to enter. Many existing gambling outlets are beginning to merge, like Eldorado and Caesars, and this means there will be fewer and fewer ownership groups with any power over the licenses needed to operate in each state, stifling competition and leaving customers with little choice.
At first glance, you might think it makes some sense for states to operate in this way: casinos and racetracks are often the only private businesses offering other forms of legal gambling, so sports betting seems a natural extension.
However, take the commercial airline industry as an analogy, since it also comes with a high barrier for entry, limited access points to the product (airports) and a history of consolidation. Now imagine if the airlines had been granted that right to operate by virtue of owning railroads. That would seem absurd, but in essence, that’s what states are doing when they award sports-betting licenses to casinos and racetracks.
Not only is it illogical, but there are a number of crucial reasons giving local casino and racetrack operators control of the sportsbook scene is bad state policy. First, even forgetting issues of competition, most existing local gambling enterprises don’t have the capacity or expertise to operate their own sports-betting businesses, especially in a mobile-first world.
Running a sportsbook is far more expensive, complicated and volatile than operating slot machines, blackjack tables or pari-mutuel horse wagering. Compared to other forms of gambling, sportsbooks’ margins are razor-thin because of a small house edge. Meanwhile, fixed and variable costs are high because of specialized compliance, high employment costs and the increasing prices of sporting-event data that fuels the entire operation.
As a result, most casinos decide to outsource the operation to companies that specialize in providing a minimum viable product (for in-person and mobile betting) that can be easily integrated with a wide range of casinos and racetracks. For these B2B sports-betting providers, the business model is for their product to fit with often outdated casino-management technology and thinking, so there is little incentive to innovate or compete on customer experience. Unfortunately, for consumers, the result is a choice between largely similar, dull products built and maintained by a small number of faceless companies.
In some states, such as New Jersey, West Virginia and Indiana, this problem is slightly addressed by the state offering additional mobile sports-betting licenses that gambling operators can sell through a bidding process to third-party B2C providers. What this should mean is more sports-betting providers and increased competition, creating higher revenue generation and, therefore, higher tax revenue for the state. In fact, New Jersey, due to its legislation, has already overtaken Nevada as the leader in sports-betting tax revenue, despite it being a new market.
However, that’s where the second key issue comes in: consolidation. There are more and more mergers in the casino and racetrack industries, meaning fewer local enterprises in any particular state with the power to sell these third-party licenses. This, in turn, creates the risk of these companies selling to the same providers, reducing competition and controlling the market.
The “skins” model has been working in New Jersey in part because there were enough local casinos and racetracks to prevent collusion and market manipulation. With 12 operators owned by 10 different ownership groups, it would have been nearly impossible to prevent a qualified, motivated and well-capitalized B2C sportsbook from entering the New Jersey market. However, the nationwide merger between Caesars and Eldorado means that four of the 12 are now owned by the new entity—and who’s to say it stops there?
This gambling goliath now owns 60 premises across 16 states in the U.S. and appears to have a great appetite to acquire even more. What this means, along with the fact that other companies will also be looking to merge, is in an increasing number of states, we are going to see gradually fewer ownership groups with control of the sports-betting industry. This could lead to a nationwide environment of scarce competition, preventing innovative newcomers from coming into the market with great products and leaving consumers with only a few options to choose from.
Not only could U.S. customers be deprived of some of the great sports-betting products we have in Europe, but they might also suffer from being offered lousy odds by these super-mergers. Without competition, companies are not pressured to offer the best price, which is key to leveling the playing field in the sports-betting industry between the provider and customer.
Fortunately, we entered the U.S. market in Indiana and Colorado early and took advantage of the skins system in these states before it could become too difficult. However, if this newly regulated industry is to thrive in terms of the money it generates and offering customers a wide variety and high quality of choice, the state must consider creating an open market and ending the granting of licenses by private companies.
This is the current system across most of Europe, and the result is that newcomers are entering the industry, pioneering new products and creating fierce competition, which benefits the consumer and the state—something everyone across the U.S. should be able to enjoy too.